8 Best Practices for Successful 401(k) Plans
Offering a high-quality 401(k) plan can attract, reward, and retain top talent employees. If you’re considering starting a 401(k) plan for your employees or looking for ways to improve your current plan, here are some best practices to keep in mind.
1. Promote the plan.
The more your employees know about the plan, the more likely they are to participate and save for retirement. Encourage employees to start saving sooner rather than later, highlighting the benefit of saving for retirement while reducing income tax. Emphasize that any company match is like receiving a bonus.
2. Offer immediate eligibility and a shorter vesting schedule.
Make it easy for employees to participate in the plan by offering immediate eligibility. This means that employees can start contributing to the plan as soon as they’re hired. Additionally, consider offering a shorter vesting schedule than required by law. A 3- or 4-year vesting schedule can eliminate company dollars being spent on “short-timers” while still providing an incentive for employees to stay with the company.
3. Provide a company match.
A company match is a great way to encourage employees to save for retirement. Consider matching the first 6%-10% of employees’ contributions. Participants tend to take full advantage of the company match, therefore 25 cents on the dollar up to 10% may be a better approach than 50 cents on the dollar up to 5%. The company match is tax deductible and is a way to help your employees reach their retirement goals.
4. Keep investment options simple.
Offer sufficient diversification but limit the number of investment options to 15 or fewer. Too many choices tend to overwhelm employees and lower the likelihood of employees participating. Provide professionally allocated portfolios based on risk tolerance or retirement date.
5. Consider auto-enroll and auto-increase options.
Automatically enrolling employees is an effective way to increase participation and ensure most of your employees are saving. Use an auto-increase feature to increase their deferral percentage each year by 1% until they reach a target maximum. This will encourage employees to save more over time without requiring any additional effort on their part.
6. Offer low expense, market-efficient investments.
Provide index mutual funds and/or exchange-traded funds (ETFs). Most actively managed mutual funds have underperformed market indexes over time, making low expense investments a smart choice for your employees.
7. Utilize the Roth 401(k) feature.
Allow participants to make their contributions either pre-tax (traditional 401k deferrals) or after-tax (Roth) or a combination of the two. The Roth provision may be the only way for a high-income earner to have a Roth retirement account. This provides the opportunity to diversify one’s income stream in retirement.
8. Encourage a focus on long-term saving and investing and be cautious with loan features.
Encourage employees to focus on long-term saving and investing, as opposed to using the plan as a short-term loan. While allowing employees to access their 401(k) balance in a true emergency is a nice feature, over time withdrawals hurt growth. If an employee leaves your company with an outstanding loan and is unable to repay, the loan becomes a distribution and is taxable, plus a penalty will apply if under the age of 59 ½.
In summary, offering a high-quality 401(k) plan can help attract, reward, and retain top talent employees. By promoting the plan, offering immediate eligibility, providing a company match, keeping investment options simple, and utilizing features like auto-enrollment and the Roth 401k, you can help your employees get on the path to a comfortable retirement.
Want further guidance in setting up a successful 401(k) plan for your employees? Our institutional investing team can guide you through the process and help you make informed decisions that benefit both your business and your employees.